Congress's latest coronavirus relief package, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, is the largest economic relief bill in U.S. history and will allocate $2.2 trillion in support to individuals and businesses affected by the pandemic and economic downturn. Many people have questions about how the new law impacts their families and businesses.
The Basics
The recovery rebates (Economic Impact Payments) are refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit. s. This means that the rebate decreases a taxpayer’s tax liability dollar-for-dollar, and the credit can be refunded to a taxpayer if they have no tax liability to offset.
The rebates are tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s that will be applied to 2020 tax returns, but are advanced to taxpayers now based on their 2019 or 2018 adjusted gross income (AGI)Adjusted gross income (AGI) is a taxpayer’s total income minus certain “above-the-line” deductions. It is a broad measure that includes income from wages, salaries, interest, dividends, retirement income, Social Security benefits, capital gains, business, and other sources, and subtracts specific deductions. . The credit will be applied to 2020 tax returns using 2020’s AGI next spring, and taxpayers will receive the difference of the credit if it is in their favor.
For example, if a single taxpayer with no children made $200,000 in 2019, they would not receive an advance rebate based on their 2019 income. However, if they make $35,000 in 2020, they will receive a $1,200 refundable tax credit on their 2020 tax return. But in reverse, if a taxpayer had a $35,000 AGI in 2019 but has $200,000 AGI in 2020, they would receive a $1,200 rebate now and would not have to pay it back on their 2020 tax return.
For most Americans, no action is required. The IRS will use data from the most current tax returns or Social Security data to provide a rebate to Americans either via direct deposit (if such information is available) or through a paper check in the mail to the last address on file.
U.S. Treasury Secretary Steven Mnuchin said he hopes to distribute rebates to taxpayers who e-filed with direct deposit banking information in three weeks. Taxpayers receiving rebate checks may have to wait six to eight weeks to receive a paper check in the mail.
Treasury will be developing a web-based portal for individuals to provide their banking information to the IRS online. Taxpayers will be able to receive payments immediately as opposed to checks in the mail.
Yes. The IRS has recommended taxpayers to e-file as soon as possible if they think they will be owed a refund and has specifically advised taxpayers not to wait until July 15, the extended deadline from the usual April 15 date.
No. The recovery rebates are an additional refundable tax credit that will be applied to 2020 tax returns, but estimates are paid out to taxpayers based on 2019 or 2018 adjusted gross income (AGI). This is an additional credit for the taxpayer on top of whatever refund or tax is owed for the 2020 tax year.
For example, imagine a single taxpayer with no children who made $35,000 AGI in 2019. This taxpayer will receive a $1,200 rebate now, and this rebate would also show up in the taxpayer’s 2020 tax return as a tax credit already received. If the taxpayer would be receiving a $500 tax refund based on their income tax withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. , they would still receive that $500 refund when they file their 2020 tax return.
The IRS has stated that those who filed their taxes electronically and provided direct deposit information will get their money the fastest.
Treasury will be developing a web-based portal for individuals to provide their banking information to the IRS online. Taxpayers will be able to receive payments faster as opposed to waiting for checks in the mail.
Rebates for Dependents
No, even filers with $0 of income can file for the rebate. However, they must file a tax return to ensure the IRS can process the rebate. Additionally, they must have a Social Security Number and not be claimed as a dependent on another person’s return.
The CARES Act uses the Child Tax Credit (CTC)The federal child tax credit (CTC) is a partially refundable credit that allows low- and moderate-income families to reduce their tax liability dollar-for-dollar by up to ,000 for each qualifying child. The credit phases out depending on the modified adjusted gross income amounts for single filers or joint filers. eligibility standards. All qualifying children who are under age 17 who have not provided for more than half of their own expenses and lived with the taxpayer for more than six months are eligible. This means that adult dependents, such as college students aged 17 and over, and elderly dependents do not qualify for the $500 rebate. Adult dependents do not qualify for their own rebate either.
The CARES Act does not provide a maximum number of children that can be claimed. However, for each dependent to qualify they must be claimed by the taxpayer on their tax return.
If a taxpayer has not already filed a 2019 return with the name and Social Security Number (SSN) of the eligible dependent being claimed, the filer will not receive credit for those dependents born after they filed their 2018 return. However, the taxpayer may claim a $500 credit for each eligible child on their 2020 return.
Only the parental taxpayer claiming the child as a dependent will receive the $500.
Rebates and Tax Returns
Treasury will use tax year 2019 returns if available. If a taxpayer has not filed for tax year 2019, Treasury can fall back on 2018 return information. For those relying on Social Security and Veterans benefits but who have not filed in 2019 or 2018, Treasury Secretary Steven Mnuchin announced that these beneficiaries will not have to submit a separate tax return to receive a rebate. The payment will be sent directly to their bank account associated with those benefits. Other taxpayers who have not filed for the past two years should submit a tax return for 2018 or 2019 as soon as possible to receive their rebate.
Yes, the IRS will look at your 2018 tax return to check for rebate eligibility but has also advised all taxpayers expecting a refund to file their 2019 tax return as soon as possible. Social Security beneficiaries will still receive rebates even if they have not filed tax returns for 2018 or 2019; their rebates will be sent to the bank account associated with receiving benefits.
If a taxpayer’s high income in 2019 puts them above the threshold, they may be in the phaseout range and remain eligible for a partial refund. If their income is lower in 2020 when they file taxes, any remaining credit that they are eligible for will also be refunded or deducted from their tax liability when they file taxes for 2020.
There is no penalty for receiving a rebate based on a lower income on 2019 or 2018 tax returns. If a filer’s eligible rebate rises when using 2020 tax returns, that will be remedied on their 2020 return. If the filer is given too much, the IRS will not penalize them.
No. Like all refundable tax credits (e.g., Child Tax Credit, Earned Income Tax Credit (EITC)The Earned Income Tax Credit (EITC) is a refundable tax credit targeted at low-income working families. The credit offsets tax liability, the total amount of tax debt owed by an individual, corporation, or other entity to a taxing authority like the Internal Revenue Service (IRS), and can even generate a refund, with earned income credit amounts calculated on the basis of income and number of children. ), any part of the rebate, even in excess, is not considered as part of taxable income.
Yes, if a taxpayer’s income drops in 2020, they will be eligible for any remaining rebate credit they were not able to claim using their 2019 or 2018 return.
No, if the amount of credit a taxpayer qualifies for in 2020 is less than it was based on their 2019 return, it does not have to be paid back and it is not considered taxable income.
How Does Social Security Impact Rebates?
Yes, all taxpayers are eligible for the rebate, including those receiving Social Security benefits, subject to the same eligibility rules as other taxpayers. Treasury Secretary Mnuchin announced that these beneficiaries will not have to submit a separate tax return to receive a rebate. The payment will be sent directly to their bank account associated with those benefits.
Yes, Social Security beneficiaries should receive their rebate through the bank account associated with receiving benefits.
Yes, taxpayers will qualify for the rebate as long as their Adjusted Gross Income is below the rebate thresholds depending on their filing status. If a taxpayer received Supplemental Security Income (SSI) but not Social Security benefits and did not file for taxes in 2018 or 2019, the IRS will automatically send the rebate through the way taxpayers normally receive their SSI benefits, such as direct deposit, Direct Express debit card, or by paper check.
Payroll TaxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. Changes
Employers may claim a 50 percent tax credit on the wages paid to employees from March 13 to December 31, 2020, up to a maximum of $5,000 credit per employee (applied to $10,000 of employee wages).
To qualify, firms must be suspended due to government actions related to coronavirus or experience a 50 percent decline in gross receipts during a calendar quarter when compared to the same quarter in the previous year. For firms with 100 employees or more, the credit can only be applied to employees not able to do their duties due to a business suspension or a lack of business.
If a firm takes a loan through the Paycheck Protection Program, it is not eligible to take the payroll tax credit on up to 50 percent of employee wages.
The Families First Coronavirus Response Act created tax credits on employer-side Social Security payroll taxes to offset paid family and sick leave related to the coronavirus.
This credit is different from and unrelated to the 50 percent refundable tax credit on employee wages that firms can receive. The refundable tax credit is not dependent on employees taking qualified sick or family leave and was created as part of the CARES Act.
Unemployment Insurance Changes
The new law incentivizes states to end one-week waiting periods by providing 100 percent federal financing of the first week for states without one-week waiting periods. It will be up to each individual state to remove existing one-week waiting periods.
Workers must meet these three qualifications: 1) ineligible for any other state or federal unemployment benefits; 2) unemployed, partially unemployed, or cannot work due to the COVID-19 public health emergency; and 3) cannot telework or receive paid leave. This includes workers like those who are self-employed, independent contractors, gig economy workers, and those who do not have sufficient work history to qualify for regular benefits.
These workers are now eligible for a temporary federal program called Pandemic Unemployment Assistance that provides 39 weeks of unemployment benefits.
The Pandemic Unemployment Assistance benefit amount varies by state, is subject to a minimum, and is augmented by a new $600 weekly boost called Federal Pandemic Unemployment Compensation. The length of benefits is 39 weeks, which reflects the regular 26 weeks provided under state programs plus the temporary 13-week expansion provided by the new federal law. Specifically, benefits are calculated under state law based on recent earnings, with a minimum benefit requirement that is equal to half of the state’s average weekly unemployment compensation amount.
The new law that created the $600 weekly boost is fully funded by the federal government to augment the regular unemployment benefit amount an unemployed worker receives. States are not authorized to reduce the amount or duration of their unemployment compensation during the time of the federal expansion.
Yes. The $600 weekly boost will be provided as a supplement to those who are already receiving unemployment compensation at the state level.
Additionally, the newly created Pandemic Unemployment Assistance program provides benefits (including the $600 boost) for unemployment, partial unemployment, or inability to work that began on or after January 27, 2020 and ends on or before December 31, 2020. These benefits can be paid retroactively to those who qualify.
In some cases, yes.
Individuals who can provide self-certification that they had to quit for a specific COVID-19-related reason and who do not have the ability to telework with pay, or access paid sick leave or other paid leave benefits, may qualify for Pandemic Unemployment Assistance.
Some of the specific reasons workers could qualify without being laid off include otherwise being able to work except that they are unemployed, partially unemployed, or unavailable to work because of being diagnosed with COVID-19; a family member in their household has been diagnosed with COVID-19; they are caring for a family member with COVID-19; or they have to care for their child whose daycare or school is closed due to COVID-19.
State departments of labor will administer the expanded benefits as well as their existing benefit programs. Workers will need to file a claim with the unemployment insurance program in the state where they worked, and the states will determine whether workers qualify for benefits.
The U.S. Department of Labor has more information here and here, and advises, “For now you should file for benefits as directed on your state's website and look for information about how to receive future updates.”
The federal expansion provides 13 “extra” weeks of benefits, meaning that in total, workers can qualify for up to 39 weeks of unemployment benefits during the COVID-19 public health crisis (26 weeks under state programs, plus 13 additional weeks provided by the federal government).
Federal expansions including the extra 13 weeks, the extra $600, and the extension to workers who previously didn’t qualify will be in effect through December 31, 2020.
Yes. Regular unemployment insurance is counted as income and taxed on individual tax returns, and these expansions of unemployment insurance are likewise counted as income and taxable. Taxpayers will be required to disclose all of their unemployment insurance benefits when they file their taxes.